Answers at the Bottom of the Page
Please post your answers to the Multiple Choice questions to the Assignments section.
1. Which of the following accounts does not appear in the acquisition and expenditure cycle?
a. Cash.
b. Purchases Returns.
c. Sales Returns.
d. Prepaid Insurance.
2. For which of the following accounts would the matching concept be the most
appropriate?
a. Cost of Goods Sold.
b. Research and Development.
c. Depreciation Expense.
d. Sales.
3. Which of the following would not overstate current period net income?
a. Capitalizing an expenditure that should be expensed.
b. Failing to record a liability for an expenditure.
c. Failing to record a check paying an item in Vouchers Payable.
d. All of the above would overstate net income.
4. A client’s purchasing system ends with the recording of a liability and its eventual
payment. Which of the following best describes the auditor’s primary concern with
respect to liabilities resulting from the purchasing system?
a. Accounts payable are not materially understated.
b. Authority to incur liabilities is restricted to one designated person.
c. Acquisition of materials is not made from one vendor or one group of vendors.
d. Commitments for all purchases are made only after established competitive bidding
procedures are followed.
5. Which of the following is an internal control activity that could prevent a paid
disbursement voucher from being presented for payment a second time?
a. Vouchers should be prepared by individuals who are responsible for signing disbursement
checks.
b. Disbursement vouchers should be approved by at least two responsible management
officials.
c. The date on a disbursement voucher should be within a few days of the date the voucher
is presented for payment.
d. The official who signs the check should compare the check with the voucher and should
stamp “PAID” on the voucher documents.
6. Budd, the purchasing agent of Lake Hardware Wholesalers, has a relative who owns a
retail hardware store. Budd arranged for hardware to be delivered by manufacturers to the
retail store on a COD basis, thereby enabling his relative to buy at Lake’s wholesale
prices. Budd was probably able to accomplish this because of Lake’s poor internal control
over:
a. Purchase requisitions.
b. Cash receipts.
c. Perpetual inventory records.
d. Purchase orders.
7. Which of the following is the best audit procedure for determining the existence of
unrecorded liabilities?
a. Examine confirmation requests returned by creditors whose accounts appear on a
subsidiary trial balance of accounts payable.
b. Examine a sample of cash disbursements in the period subsequent to year-end.
c. Examine a sample of invoices a few days prior to and subsequent to the year-end to
ascertain whether they have been properly recorded.
d. Examine unusual relationships between monthly accounts payable and recorded
purchases.
8. Which of the following procedures is least likely to be performed before the balance sheet
date?
a. Observation of inventory.
b. Review of internal control over cash disbursements.
c. Search for unrecorded liabilities.
d. Confirmation of receivables.
9. To determine whether accounts payable are complete, an auditor performs a test to verify
that all merchandise received has been recorded. The population for this test consists of
all
a. Vendors’ invoices.
b. Purchase orders.
c. Receiving reports.
d. Canceled checks.
(AICPA adapted)
10. When verifying debits to the perpetual inventory records of a nonmanufacturing
company, an auditor would be most interested in examining a sample of purchase
a. Approvals.
b. Requisitions.
c. Invoices.
d. Orders.
SOLUTIONS FOR MULTIPLE‑CHOICE QUESTIONS
1.
2.
3.
4.
5.
6.
7.
8.
C
A
C
A
D
D
B
C
9. C
10. C